10-Q 1 q20410q.txt Q204 FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2004 Commission File Number: 0-21683 ---------------------- GraphOn Corporation (Exact name of Registrant as specified in its charter) ---------------------- Delaware 13-3899021 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 3130 Winkle Avenue Santa Cruz, CA 95065-1913 (Address of principal executive offices) Registrant's telephone number: (800) 472-7466 ---------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [ ] No [X] As of August 3, 2004, there were issued and outstanding 21,696,765 shares of the Registrant's Common Stock, par value $0.0001. ================================================================================ GRAPHON CORPORATION FORM 10-Q Table of Contents Page PART I. Item 1.Financial Statements Condensed Balance Sheets 2 Condensed Statements of Operations and Comprehensive Loss 3 Condensed Statements of Cash Flows 4 Notes to Condensed Financial Statements 5 Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3.Quantitative and Qualitative Disclosures About Market Risk 21 Item 4.Controls and Procedures 21 PART II. Item 2.Changes in Securities, Uses of Proceeds and Issuer Purchases of Equity Securities 22 Item 5.Other Information 22 Item 6.Exhibits and Reports on Form 8-K 22 Signatures 23 PART I--FINANCIAL INFORMATION ITEM I Financial Statements GRAPHON CORPORATION CONDENSED BALANCE SHEETS
June 30, December 31, 2004 2003 ASSETS ----------- ----------- ------------ (Unaudited) Current Assets: Cash and cash equivalents ........................ $ 1,258,800 $ 1,025,500 Accounts receivable, net of allowance for doubtful accounts of $46,800 and $46,800 ........ 716,300 521,100 Prepaid expenses and other current assets ........ 24,100 23,100 ----------- ----------- Total Current Assets ............................. 1,999,200 1,569,700 ----------- ----------- Property and equipment, net ........................ 99,600 144,800 Purchased technology, net .......................... -- 335,000 Capitalized software, net .......................... 382,800 500,600 Other assets ....................................... 10,800 11,900 ----------- ----------- TOTAL ASSETS .................................... $ 2,492,400 $ 2,562,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Accounts payable ................................. $ 109,200 $ 52,300 Accrued expenses ................................. 413,900 470,800 Deferred revenue ................................. 915,800 763,000 ----------- ----------- Total Current Liabilities ........................ 1,438,900 1,286,100 ----------- ----------- Long-term Liabilities: Deferred revenue ................................. 422,000 429,000 Commitments and contingencies ----------- ----------- TOTAL LIABILITIES ............................... 1,860,900 1,715,100 ----------- ----------- Stockholders' Equity: Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding - - Common stock, $0.0001 par value, 45,000,000 shares authorized, 21,666,097 and 16,618,459 shares issued and outstanding 2,200 1,700 Additional paid in capital 46,931,900 45,985,300 Notes receivable (50,300) (50,300) Accumulated other comprehensive loss (900) (1,400) Accumulated deficit (46,251,400) (45,088,400) ----------- ----------- TOTAL STOCKHOLDERS' EQUITY 631,500 846,900 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,492,400 $ 2,562,000 =========== =========== See accompanying notes to condensed financial statements.
2 GRAPHON CORPORATION CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 2004 2003 2004 2003 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Revenue: Product licenses .......................... $ 430,800 $ 931,100 $ 1,077,000 $ 1,748,300 Service fees .............................. 241,900 202,500 494,000 391,700 Other ..................................... 4,700 41,700 9,300 79,100 ----------- ----------- ----------- ----------- Total Revenue .......................... 677,400 1,175,300 1,580,300 2,219,100 ----------- ----------- ----------- ----------- Cost of Revenue: Product costs ............................. 230,800 248,500 457,100 500,700 Service costs ............................. 73,800 94,500 157,700 166,800 ----------- ----------- ----------- ----------- Total Cost of Revenue .................. 304,600 343,000 614,800 667,500 ----------- ----------- ----------- ----------- Gross Profit ........................... 372,800 832,300 965,500 1,551,600 ----------- ----------- ----------- ----------- Operating Expenses: Selling and marketing ..................... 404,700 448,300 762,800 869,200 General and administrative ................ 263,000 481,700 512,700 838,000 Research and development .................. 440,000 318,800 859,600 646,800 ----------- ----------- ----------- ----------- Total Operating Expenses .................. 1,107,700 1,248,800 2,135,100 2,354,000 ----------- ----------- ----------- ----------- Loss From Operations ...................... (734,900) (416,500) (1,169,600) (802,400) ----------- ----------- ----------- ----------- Other Income (Expense): Interest and other income .............. 2,900 3,100 6,500 8,900 Interest and other expense ............. - (4,300) - (4,300) ----------- ----------- ----------- ----------- Total Other Income (Expense) ........... 2,900 (1,200) 6,500 4,600 ----------- ----------- ----------- ----------- Net Loss .................................. $ (732,000) $ (417,700) $(1,163,100) $ (797,800) Other Comprehensive Loss, net of tax Foreign currency translation gain (loss) (100) - 500 (600) ----------- ----------- ----------- ----------- Comprehensive Loss ........................ $ (732,100) $ (417,700) $(1,162,600) $ (798,400) =========== =========== =========== =========== Basic and Diluted Loss per Common Share.... $ (0.03) $ (0.03) $ (0.06) $ (0.05) =========== =========== =========== =========== Weighted Average Common Shares Outstanding. 21,647,086 16,602,719 20,869,550 16,598,708 =========== =========== =========== =========== See accompanying notes to condensed financial statements.
3 GRAPHON CORPORATION CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2004 2003 ----------- ----------- (Unaudited) (Unaudited) Cash Flows From Operating Activities: Net loss ........................................... $(1,163,100) $ (797,800) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ................... 517,400 632,000 Loss on disposal of fixed assets ................ - 4,300 Interest accrued on directors notes receivable ... (700) (1,000) Provision for doubtful accounts ................. - 5,200 Changes in operating assets and liabilities: Accounts receivable ............................. (195,200) (230,000) Prepaid expenses and other assets ............... (1,000) 175,400 Accounts payable ................................ 56,900 (66,000) Accrued expenses ................................ (56,900) (327,800) Deferred revenue ................................ 145,800 45,400 ----------- ----------- Net Cash Used In Operating Activities .............. (696,800) (560,300) ----------- ----------- Cash Flows From Investing Activities: Capitalization of software development costs ....... - (282,200) Capital expenditures ............................... (18,600) (1,600) Other assets ....................................... 1,100 40,400 ----------- ----------- Net Cash Used In Investing Activities ........... (17,500) (243,400) ----------- ----------- Cash Flows From Financing Activities: Proceeds from exercise of warrants ................. 6,900 - Proceeds from private placement of common stock ................................... 1,150,000 - Costs of private placement of common stock ......... (213,400) - Proceeds from sale of common stock under employee stock purchase plan ...................... 3,600 2,000 ----------- ----------- Net Cash Provided By Financing Activities ....... 947,100 2,000 ----------- ----------- Effect of exchange rate fluctuations on cash and cash equivalents ................................ 500 (600) ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents 233,300 (802,300) Cash and Cash Equivalents, beginning of period ..... 1,025,500 1,958,200 ----------- ----------- Cash and Cash Equivalents, end of period ........... $ 1,258,800 $ 1,155,900 =========== =========== Supplemental Disclosure of Cash Flow Information: None. Noncash Investing and Financing Activities: None. See accompanying notes to condensed financial statements.
4 GRAPHON CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS 1. Basis of Presentation The unaudited condensed financial statements of GraphOn Corporation (the Company) included herein have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of the Company's results of operations, financial position and cash flows. The unaudited condensed financial statements included herein reflect all adjustments (which include only normal, recurring adjustments in the three and six-month periods ended June 30, 2004) that are, in the opinion of management, necessary to state fairly the results for the periods presented. This Quarterly Report on Form 10-Q should be read in conjunction with the Company's audited financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2003, which was filed with the Securities and Exchange Commission (the Commission) on March 30, 2004. The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending December 31, 2004, or any future period. The Company's condensed financial statements have been presented on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has suffered from recurring losses and has absorbed significant cash in its operating activities. These matters raise substantial doubt about the ability of the Company to continue in existence as a going concern. The condensed financial statements do not include any adjustments relating to the recoverability and classification of assets or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. Management believes that the Company will be able to support its operational needs with currently available resources for at least the next few quarterly periods. The Company has been successful in significantly reducing operating costs through a series of strategic restructurings and work force reductions that began in September of 2001. During the first quarter of 2004, the Company successfully raised approximately $936,600, net, in a private placement of its common stock. The Company continues to operate its business on a cash basis by striving to bring cash expenditures in line with revenues while simultaneously looking at ways to improve its revenue stream. Additionally, the Company continues to review potential business combination opportunities as they present themselves and at such time as one might make financial sense and add value for the shareholders, the Company will pursue it. The Company believes that improving its current revenue stream, coupled with its cash on hand, including the cash raised in the private placement, will support its planned operations during 2004. Certain amounts in the prior period's financial statements have been reclassified to conform to the current period's presentation. 5 2. Revenue Product line revenue for the three-month periods ended June 30, 2004 and 2003, was as follows:
Change in Product licenses 2004 2003 Dollars Percent ---------------- ----------- ----------- ----------- --------- Windows ..... $ 179,200 $ 645,100 $ (465,900) (72.2)% Unix ........ 251,600 286,000 (34,400) (12.0) ----------- ----------- ----------- --------- 430,800 931,100 (500,300) (53.7) ----------- ----------- ----------- --------- Service fees Windows ..... 116,300 48,600 67,700 139.3 Unix ........ 125,600 153,900 (28,300) (18.4) ----------- ----------- ----------- --------- 241,900 202,500 39,400 19.5 ----------- ----------- ----------- --------- Other (1) ... 4,700 41,700 (37,000) (88.7) ----------- ----------- ----------- --------- Total Revenue $ 677,400 $ 1,175,300 $ (497,900) (42.4)% =========== =========== =========== =========
Product line revenue for the six-month periods ended June 30, 2004 and 2003, was as follows:
Change in Product licenses 2004 2003 Dollars Percent ---------------- ----------- ----------- ----------- --------- Windows ..... $ 608,900 $ 1,057,700 $ (448,800) (42.4)% Unix ........ 468,100 690,600 (222,500) (32.2) ----------- ----------- ----------- --------- 1,077,000 1,748,300 (671,300) (38.4) ----------- ----------- ----------- --------- Service fees Windows ..... 253,300 90,900 162,400 178.7 Unix ........ 240,700 300,800 (60,100) (20.0) ----------- ----------- ----------- --------- 494,000 391,700 102,300 26.1 ----------- ----------- ----------- --------- Other (1) ... 9,300 79,100 (69,800) (88.2) ----------- ----------- ----------- --------- Total Revenue $ 1,580,300 $ 2,219,100 $ (638,800) (28.8)% =========== =========== =========== ========= (1) 2004 is comprised of the amortization of private labeling fees. 2003 is comprised of the amortization of distribution and private labeling fees.
3. Loss Per Share Basic loss per share is calculated using the weighted average number of shares outstanding during the period. Diluted loss per share is not included since they are antidilutive. 4. Stockholders' Equity During the second quarter of 2004, the Company issued 30,000 shares of common stock upon the exercise of warrants issued in conjunction with the private placement transaction consummated during the first quarter of 2004. The Company received cash proceeds of $6,900 as a result of the exercise of these warrants. During the first quarter of 2004, the Company issued 5,000,000 shares of common stock in a private placement transaction resulting in cash proceeds of $1,150,000. The costs of the private placement, which include commissions, legal fees, accounting fees, registration and other miscellaneous fees, have aggregated approximately $213,400 through the six months ended June 30, 2004. Also during the first quarter, the Company issued 17,638 share of common stock to employees under provisions of the Employee Stock Purchase Plan (the ESPP), resulting in cash proceeds of approximately $3,600. 6 5. Litigation The Company is currently not involved in any litigation that it believes would have a materially adverse affect upon its financial results or financial position. 6. Stock-Based Incentive Programs The Company accounts for stock-based compensation under the intrinsic value method of accounting for stock awards, in accordance with Accounting Principles Board Opinion number 25, "Accounting for Stock Issued to Employees" (APB 25) as permitted by Statement of Financial Accounting Standards number 123, "Stock-Based Compensation" (SFAS 123). The Company has not changed to the fair value method of accounting for stock-based employee compensation. SFAS 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" requires that information be provided as if the Company had accounted for stock options under the fair value method of this statement, including disclosing pro forma information regarding net loss and loss per share beginning with the first quarter of 2003. Had the Company applied the fair value recognition provisions of SFAS 123 to stock-based compensation, the Company's net loss and basic and diluted loss per share would have been changed from the "as reported" amounts to the "pro forma" amounts as follows for each of the respective periods:
Three months ended June 30, 2004 2003 --------- --------- Net loss: As reported: ......................... $(732,000) $(417,700) Add: stock-based compensation expense included in net loss, net of related tax effects .......................... - - Deduct: total stock-based compensation expense determined under fair-value method for all awards, net of related tax effects .......................... (44,400) (56,800) --------- --------- Pro forma net loss ................... $(776,400) $(474,500) ========= ========= Basic and diluted loss per share: As reported .......................... $ (0.03) $ (0.03) Pro forma ............................ $ (0.04) $ (0.03)
Six months ended June 30, 2004 2003 ----------- ----------- Net loss: As reported: ......................... $(1,163,100) $ (797,800) Add: stock-based compensation expense included in net loss, net of related tax effects .......................... - - 7 Deduct: total stock-based compensation expense determined under fair-value method for all awards, net of related tax effects .......................... (73,000) (190,200) ----------- ----------- Pro forma net loss ................... $(1,236,100) $ (988,000) =========== =========== Basic and diluted loss per share: As reported .......................... $ (0.06) $ (0.05) Pro forma ............................ $ (0.06) $ (0.06)
7. Commitments and Contingencies Effective November 1, 2003, the Company commenced a one-year operating lease for its engineering facility in New Hampshire, which is cancelable by either party with 30 days written notice. Monthly rent payments for this facility are approximately $5,000. All other facilities currently occupied by the Company are being rented on a month-to-month basis and have no future minimum annual lease payments associated with them. The aggregate monthly rental payments for the month-to-month facilities currently being occupied are approximately $3,000. As of June 30, 2004 there are no leases in effect that require minimum payments to be made subsequent to October 31, 2004. ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements The following discussion of our financial condition and results of operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors. Such factors, including those that follow, and other factors set forth under "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2003 and in other documents we filed with the Securities and Exchange Commission, could have a material adverse effect upon our business, results of operations and financial condition. We Have A History Of Operating Losses And Expect These Losses To Continue, At Least For The Near Future. We have experienced significant losses since we began operations. We expect to continue to incur losses at least for the near future. We have slashed our expenses over the course of the last three years; however, we cannot give assurance that revenues will increase sufficiently to exceed current expense levels. If revenues grow more slowly than anticipated, or if operating expenses exceed expectations, we may not become profitable. Even if we become profitable, we may be unable to sustain profitability. If We Are Unable To Generate a Positive Cash Flow From Operations, Or Are Unsuccessful In Securing Alternative Means Of Financing, We May Not Be Able To Continue Our Operations. 8 We have not been able to generate positive cash flow from our operations and have been financing our operations primarily from the cash raised when we called various warrants in 1999 and 2000, and from the sale of common stock in the private placement that occurred during the first quarter of 2004. If we were unable to generate positive cash flow from our operations or we were unable to raise alternative sources of financing, we may need to discontinue our operations entirely. Our Revenue Is Typically Generated From A Very Limited Number Of Significant Customers. A material portion of our revenue during any reporting period is typically generated from a very limited number of customers. Consequently, if any of these significant customers reduce their order level or fail to order during a reporting period, our revenue could be materially adversely impacted. Several of our significant customers are independent software vendors (ISVs) who have bundled our products with theirs to sell as web-enabled versions of their products. Other significant customers include distributors who sell our products directly. We do not control our significant customers. Some of our significant customers maintain inventories of our products for resale to smaller end-users. If they reduce their inventory of our products, our revenue and business could be materially adversely impacted. If We Are Unable To Develop New Products And Enhancements To Our Existing Products, Our Business, Results Of Operations And Financial Condition Could Be Materially Adversely Impacted. Our future success depends on our ability to continually enhance our current products and develop and introduce new products that our customers choose to buy. If we are unable to satisfy our customers' demands and remain competitive with other products that could satisfy their needs by introducing new products and enhancements, our business, results of operations and financial condition could be materially adversely impacted. Our future success could be limited by: o severely constrained resources currently available to dedicate to development; o delays in introductions of new products; and o competitors with more resources whose new products, enhancements or technologies could replace or shorten the life cycle of our existing products. Our Stock Price Has Historically Been Volatile And You Could Lose The Value Of Your Investment. Our stock price has historically been volatile; it has fluctuated significantly to date. The trading price of our stock is likely to continue to be highly volatile and subject to wide fluctuations. Your investment in our stock could lose value. 9 Overview We are developers of business connectivity software, including Unix, Linux and Windows server-based software, with an immediate focus on web-enabling applications for use by independent software vendors (ISVs), application service providers (ASPs), corporate enterprises, governmental and educational institutions, and others. Server-based computing, sometimes referred to as thin-client computing, is a computing model where traditional desktop software applications are relocated to run entirely on a server, or host computer. This centralized deployment and management of applications reduces the complexity and total costs associated with enterprise computing. Our software architecture provides application developers with the ability to relocate applications traditionally run on the desktop to a server, or host computer, where they can be run over a variety of connections from remote locations to a variety of display devices. With our server-based software, applications can be web enabled, without any modification to the original application software required, allowing the applications to be run from browsers or portals. Our server-based technology can web-enable a variety of Unix, Linux or Windows applications. In order to ensure that we will be able to realize our assets and settle our liabilities within the normal course of our business operations, we must consider several aggressive strategic initiatives aimed at increasing revenue or securing additional alternative sources of financing. If we were unsuccessful in increasing revenues or finding additional alternative sources of financing, we would face a severe constraint on our ability to sustain operations in a manner that would create future growth and viability, and we may need to cease operations entirely. Critical Accounting Policies The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions and estimates that affect the amounts reported in the Condensed Financial Statements and accompanying notes. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, the impairment of intangible assets, contingencies and other special charges and taxes. Actual results could differ materially from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Condensed Financial Statements. In accordance with Statement of Position (SOP) 97-2, "Software Revenue Recognition," we recognize revenue from the sale of software licenses when all the following conditions are met: o Persuasive evidence of an arrangement exists; o Delivery has occurred or services have been rendered; o Our price to the customer is fixed or determinable; and o Collectibility is reasonably assured. In general, software license revenues are recognized when a non-cancelable license agreement has been signed and the customer acknowledges an unconditional 10 obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable and collection is considered probable. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs when the media containing the licensed programs is provided to a common carrier. In the case of electronic delivery, delivery occurs when the customer is given access to the licensed programs. If collectibility is not considered probable, revenue is deferred and not recognized until the fee is collected. Under SOP 97-2, revenue earned on software arrangements involving multiple elements is allocated to each element of the arrangement based on the relative fair values of the elements. If there is no evidence of the fair value for all the elements in a multiple element arrangement, all revenue from the arrangement is deferred until such evidence exists or until all elements are delivered. The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer's credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due to us could be adversely affected. Software development costs incurred in the research and development of new products are expensed as incurred until technological feasibility, in the form of a working model, has been established, at which time such costs are typically capitalized until the product is available for general release to customers. Capitalized costs are amortized based on either estimated current and future revenue for the product or straight-line amortization over the shorter of three years or the remaining estimated life of the product, whichever produces the higher expense for the period. We will perform impairment tests on our intangible assets on an annual basis and between annual tests in certain circumstances. In response to changes in industry and market conditions, we may strategically realign our resources, dispose of, or otherwise exit businesses, and consider further restructurings, which could result in an impairment of intangible assets in the future. We are subject to the possibility of various loss contingencies arising in the ordinary course of business. We consider the likelihood of the loss or impairment of an asset or the incurrence of a liability as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued if it is probable that a liability has been incurred or an asset has been impaired and the amount of the loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted. We apply APB 25 and related interpretations when accounting for our stock option and stock purchase plans. In accordance with APB 25, we apply the intrinsic value method in accounting for employee stock options. Accordingly, we generally recognize no compensation expense with respect to stock-based awards to employees. 11 We have determined pro forma information regarding net income and earnings per share as if we had accounted for employee stock options under the fair value method as required by SFAS 123. The fair value of these stock-based awards to employees was estimated using the Black-Scholes option-pricing model. Had compensation cost for our stock option plans and employee stock purchase plan been determined consistent with SFAS 123, our reported net loss and net loss per share would have been changed to the amounts indicated in Note 6. Results of Operations for the Three and Six-Month Periods Ended June 30, 2004 Versus the Three and Six-Month Periods Ended June 30, 2004. Revenue Product line revenue for the three-month periods ended June 30, 2004 and 2003 was as follows:
Change in Product licenses 2004 2003 Dollars Percent ---------------- ----------- ----------- ----------- --------- Windows ..... $ 179,200 $ 645,100 $ (465,900) (72.2)% Unix ........ 251,600 286,000 (34,400) (12.0) ----------- ----------- ----------- --------- 430,800 931,100 (500,300) (53.7) ----------- ----------- ----------- --------- Service fees Windows ..... 116,300 48,600 67,700 139.3 Unix ........ 125,600 153,900 (28,300) (18.4) ----------- ----------- ----------- --------- 241,900 202,500 39,400 19.5 ----------- ----------- ----------- --------- Other (1) ... 4,700 41,700 (37,000) (88.7) ----------- ----------- ----------- --------- Total Revenue $ 677,400 $ 1,175,300 $ (497,900) (42.4)% =========== =========== =========== =========
Product line revenue for the six-month periods ended June 30, 2004 and 2003, was as follows:
Change in Product licenses 2004 2003 Dollars Percent ---------------- ----------- ----------- ----------- --------- Windows ..... $ 608,900 $ 1,057,700 $ (448,800) (42.4)% Unix ........ 468,100 690,600 (222,500) (32.2) ----------- ----------- ----------- --------- 1,077,000 1,748,300 (671,300) (38.4) ----------- ----------- ----------- --------- Service fees Windows ..... 253,300 90,900 162,400 178.7 Unix ........ 240,700 300,800 (60,100) (20.0) ----------- ----------- ----------- --------- 494,000 391,700 102,300 26.1 ----------- ----------- ----------- --------- Other (1) ... 9,300 79,100 (69,800) (88.2) ----------- ----------- ----------- --------- Total Revenue $ 1,580,300 $ 2,219,100 $ (638,800) (28.8)% =========== =========== =========== ========= (1) 2004 is comprised of the amortization of private labeling fees. 2003 is comprised of the amortization of distribution and private labeling fees.
The decrease in Windows-based product revenue in the second quarter of 2004, as compared with the same period in 2003, was primarily due to decreased product ordering levels from one of our significant ISV customers and the deferral of product revenue related to two transactions entered into with one of our distributors. In the second quarter of 2004 we did not receive any product orders from one of our significant ISV customers, whereas in the second quarter of 2003 we received approximately $290,000 of product orders from this customer. This customer had previously informed us that they would begin selling our Windows-based products as an add-on to their software application products, instead of bundling our products within theirs. Given the customer's changed 12 sales model, we are unable to assess what effect this may have on our total revenue from this customer for the remainder of 2004. During the second quarter of 2004, we entered into two transactions with one of our distributors that we ended up deferring because not all elements required to recognize revenue had been met. We deferred approximately $276,900 of Windows-based product revenue, in the aggregate, from these two transactions. This amount is reported as a component of deferred revenue - current liabilities on our balance sheet. We anticipate collecting these amounts and recognizing the revenue during the third quarter of 2004. The decrease in Unix product license revenue in the second quarter of 2004, as compared with the second quarter of 2003, was primarily due to the sporadic nature of product license revenue derived from enterprise end users. During the second quarter of 2003, we recorded product-licensing revenue of approximately $97,000 from four particular enterprise end users, as compared with approximately $52,700 from these customers during the second quarter of 2004. The revenue decrease from these four customers accounts for the majority of the overall decrease in Unix product license revenue. Enterprise customers such as these have historically tended to license our software intermittently, leading to the volatile nature of our revenue streams. Service fees recognized from the sale of Windows-based service contracts increased in the second quarter of 2004, as compared to the second quarter of 2003, primarily as a result of the release of Go-Global for Windows during the fourth quarter of 2002. Sales of our Windows-based products began increasing with the release of Go-Global for Windows, including the sales of service contracts to support the product. The sale of Windows-based products and service contracts continued to grow throughout 2003 and into the first quarter of 2004. Virtually all of our Windows-based service contracts are for annual service support contracts, consequently, we recognize revenue from their sale over a twelve-month period commencing in the month of sale. Service fees recognized from the sale of Unix-based service contracts decreased in the second quarter of 2004, as compared to the second quarter of 2003, primarily due to the reduction in Unix product sales, as discussed above. Additionally, a few of our larger Unix customers have opted to purchase service contracts with service periods longer than one year. Although the price of these contracts are more than a one-year contract, the amount of revenue recognized in any one year will be lower than that from a one-year contract, due to the pricing discounts offered on them. The decrease in other revenue was related to the distribution agreement we had signed with our distributor in Japan in 2001. We completed recognizing the distributors' fee revenue from the distributors agreement as of year-end 2003. Included in Windows product revenue for the first six months of 2004 is approximately $176,900 of revenue related to a transaction that occurred during the fourth quarter of 2003 for which revenue recognition had been deferred, at year-end 2003, due to various uncertainties surrounding issues pertaining to the transaction. Had these uncertainties not occurred and all elements necessary for revenue recognition been present during the fourth quarter of 2003 (at the time of the transaction), then Windows product revenue for the six-month period ended June 30, 2004 would have been $432,000, a decrease of $625,700, or 59.2% from $1,057,700 for the same period during 2003. 13 Excluding the 2003 sale recognized in 2004, the $625,700 decrease in Windows-based product revenue for the six-month period ended June 30, 2004, as compared with the same period in 2003, was primarily due to decreased ordering levels from one of our significant ISV customers. During the first six months of 2004 we received approximately $146,300 in product orders from this customer, as compared with approximately $585,000 for the first six months of 2003. This customer had previously informed us that they would begin selling our Windows-based products as an add-on to their software application products, instead of bundling our products within theirs. Given the customer's changed sales model, we are unable to assess what effect this may have on our total revenue from this customer for the remainder of 2004. Another factor contributing to the decrease in Windows-based product revenue for the six-month period ended June 30, 2004, as compared with the same period in 2003, was the deferral of approximately $276,000 of revenue from two transactions entered into with one of our distributors during the period, as previously mentioned. During the six-month period ended June 30, 2003, we recognized approximately $160,000 in Windows-based product revenue from transactions entered into with this distributor. The decrease in Unix product license revenue for the first six months of 2004, as compared with 2003, was primarily due to decreases in product license revenue derived from enterprise end users. During the first six months of 2003, we recorded product-licensing revenue of approximately $242,500 from five particular enterprise end users, as compared with approximately $26,400 from these customers during the first six months of 2004. The revenue decrease from these customers accounts for the majority of the overall decrease in Unix product licensing revenue. Enterprise customers such as these have historically tended to license our software intermittently, leading to the volatile nature of our revenue streams. Service fees recognized from the sale of Windows-based service contracts increased in the first six months of 2004, as compared to the first six months of 2003, primarily as a result of the release of Go-Global for Windows during the fourth quarter of 2002. Sales of our Windows-based products, including the sales of service contracts to support the products, began increasing with the release of Go-Global for Windows and continued throughout 2003. Revenue from a significant number of the service contracts sold during 2003, and all those sold during the first six months of 2004 has been recognized during the first six months of 2004. Service fees recognized from the sale of Unix-based service contracts decreased in the first six months of 2004, as compared to the first six months of 2003, primarily due to the reduction in Unix product sales, as discussed above. Additionally, a few of our larger Unix customers have opted to purchase service contracts with service periods longer than one year. Our customers typically purchase a maintenance contract at the time they license our product. Our Windows-based maintenance contracts are primarily for a one-year time period and generally are renewed upon expiration. Our Unix-based maintenance contracts vary in term from one to five years and generally are renewed upon expiration. Fees associated with maintenance contracts are deferred and recognized as revenue ratably over the underlying service period of the maintenance contract. 14 Currently, a significant portion of our licensing fees is derived from a limited number of customers, which vary, sometimes significantly, from quarter to quarter. We expect this trend to continue throughout 2004. Cost of Revenue Cost of revenue consists primarily of the amortization of purchased technology, capitalized technology developed in-house and customer service costs. Shipping and packaging materials are immaterial as virtually all of our deliveries are made via electronic means over the Internet. Under accounting principles generally accepted in the United States, research and development costs for new product development, after technological feasibility is established, are recorded as "capitalized software" on our balance sheet and are subsequently amortized as cost of revenue over the shorter of three years or the remaining estimated life of the products. Cost of revenue for the second quarter of 2004 decreased by $38,400, or 11.2%, to $304,600 from $343,000 for the same period in 2003. Cost of revenue for the first six months of 2004 decreased by $52,700, or 7.9%, to $614,800 from $667,500 for the same period in 2003. Product costs were lower in the second quarter and the first six months of 2004, compared with the second quarter and first six months of 2003, primarily because certain purchased technologies were fully amortized as of year-end 2003. Offsetting the fully amortized purchased technologies was the commencement of amortization of certain in-house development costs that were capitalized during 2003. Service costs were lower in the second quarter and the first six months of 2004, compared with the second quarter and first six months of 2003, primarily due to severance costs associated with the termination of one engineer during the second quarter of 2003. During the third quarter of 2004 we expect product costs to decline significantly as the remaining elements of our purchased technologies become fully amortized during the second quarter of 2004. Cost of revenue was approximately 45.0% and 29.2% of revenue for the quarters ended June 30, 2004 and 2003, respectively and 38.9% and 30.1% for the six-month periods then ended, respectively. Selling and Marketing Expenses Selling and marketing expenses primarily consist of salaries, sales commissions, travel expenses, trade show related activities, promotional, public relations and advertising costs. Selling and marketing expenses for the second quarter of 2004 decreased by $43,600, or 9.7%, to $404,700 from $448,300 for the second quarter of 2003. Selling and marketing expenses for the first six months of 2004 decreased by $106,400, or 12.2%, to $762,800 from $869,200 for the first six months of 2003. Primary factors contributing to the net decreases are summarized as follows:
Three Month Six Month Dollars Dollars Increase Increase (Decrease) (Decrease) Expense From 2003 From 2003 ------- --------- --------- Human resources ........ $ (41,600) $(105,200) 15 Overhead allocations ... (66,300) (125,300) Marketing expense ...... 45,100 133,600 Travel and entertainment 19,700 15,900 Other items ............ (500) (25,400) --------- --------- $ (43,600) $(106,400) ========= =========
The decreases in human resources costs was the aggregate wages, benefits and commissions savings we realized by having two fewer sales and marketing staff in both the second quarter and first six months of 2004, as compared with the second quarter and first six months of 2003. During the fourth quarter of 2003 we ceased allocating corporate overhead charges to sales and marketing as no sales and marketing staff were physically sharing office space at our corporate offices in Morgan Hill. The sales and marketing staff that had been sharing the space prior to this time were terminated. Such costs were classified as general and administrative expense during the first quarter of 2004. The increases in marketing expense is because we utilized the services of a marketing consulting firm throughout the second quarter and first six months of 2004 to assist us with several marketing initiatives aimed at growing revenue. We began incurring such expenses during the second quarter of 2003. Selling and marketing expenses were 59.7% and 38.1% of revenue for the quarters ended June 30, 2004 and 2003, respectively, and 48.3% and 39.2% for the six-month periods then ended, respectively. General and Administrative Expenses General and administrative expenses primarily consist of salaries and associated benefits, legal, professional and other outside services, certain costs associated with being a publicly held corporation, the allocation of corporate overhead charges and bad debts expense. General and administrative expenses for the second quarter of 2004 decreased by $218,700, or 45.4%, to $263,000 from $481,700 for the second quarter of 2003. General and administrative expenses for the first six months of 2004 decreased by $325,300, or 38.8%, to $512,700 from $838,000 for the first six months of 2003. Primary factors contributing to the net decreases are summarized as follows:
Three Month Six Months Dollars Dollars Increase Increase (Decrease) (Decrease) Expense From 2003 From 2003 ------- --------- --------- Legal Fees ......... $ (90,500) $ (99,000) Insurance .......... (42,000) (93,500) Overhead allocations (49,700) (94,100) Other items ........ (36,500) (38,700) --------- --------- $(218,700) $(325,300) ========= =========
The decrease in legal fees is primarily due to the legal fees incurred with the offer to exchange stock options we made to our employees during July 2003. The primary reason for the decrease in insurance costs was due to the discontinuance of our Directors and Officers Insurance Policy upon its expiration during 2003. 16 Our corporate overhead structure was significantly reduced when we successfully closed the negotiated buy out of the 400 Cochrane Circle lease during September 2003. Previously, we had been incurring costs associated with occupying approximately 13,500 square feet. Beginning in September 2003, when we began occupying 105 Cochrane Circle, our corporate overhead structure was based on incurring costs associated with occupying approximately 1,000 square feet of space. During the fourth quarter of 2003 all corporate overheads began being classified as general and administrative as the corporate facilities were no longer being shared by sales and marketing personnel, as previously discussed. We anticipate that aggregate general and administrative expenses for 2004 will be significantly lower than 2003. General and administrative expenses were approximately 38.8% and 41.0% of revenues for the second quarter of 2004 and 2003, respectively, and 32.4% and 37.8% for the six months periods then ended, respectively. Research and Development Expenses Research and development expenses consist primarily of salaries and benefits to software engineers, payments to contract programmers, rent, depreciation and computer related supplies. Under accounting principles generally accepted in the United States, all costs of product development incurred once technological feasibility has been established, but prior to general release of the product, are typically capitalized and amortized to expense over the estimated life of the underlying product, rather than being charged to expense in the period incurred. No product development costs were capitalized during either the second quarter or first six months of 2004, whereas approximately $169,400 and $282,200 of product development costs were capitalized during the second quarter and first six months of 2003, respectively. The majority of these costs were incurred in the development of Go-Global for Windows version 3.0, which became available for release during March 2004. Had these costs not been capitalized, then research and development expenses for the three and six-month periods ended June 30, 2004 and 2003 would have been reported as follows:
Period Ended Change in June 30, 2004 2003 Dollars Percent -------- -------------- -------------- -------------- ----------- Three-months $ 440,000 $ 488,200 $ (48,200) (9.9)% Six-months 859,600 929,000 (69,400) (7.5)
During the first quarter of 2003, we reduced our research and development staff by one. The decrease in salaries and related benefits associated with this former engineer is the primary reason for the reduction in expenses, as set forth above. Also contributing to the decrease is lower depreciation expense. During the first six months of 2003, we purchased no new assets in support of our research and development efforts. Since that time, various assets became fully depreciated and hence, did not generate depreciation expense during either the three or six-month periods ended June 30, 2004. During the fourth quarter of 2003, we successfully renegotiated the lease on our engineering office in Concord, New Hampshire at a significantly lower rate than what we had been paying. The lower rate was a result of the decrease in 17 rental market rates since the time of our previous lease and our relinquishing of the space that had been previously occupied by our sublesse. Consequently, we anticipate rent expense in 2004 to be significantly lower than rent expense in 2003. Our lease expires at the end of October 2004 and we expect to be able to either renew our lease at that time or find alternative suitable facilities at minimal cost. We anticipate that research and development expense for the next few quarterly reporting periods, inclusive of capitalized software development costs, will approximate those incurred during the corresponding periods of the prior year. Research and development expenses were approximately 65.0% and 27.1% of revenues for the second quarter of 2004 and 2003, respectively, and 54.4% and 29.1% of revenues for the first six months then ended, respectively. Interest and other income Interest and other income consists primarily of interest income on excess cash. Our excess cash is held in interest bearing money market accounts with minimum net assets greater than or equal to one billion U.S. dollars. Interest and other income for the second quarter of 2004 decreased by $200, or 6.5%, to $2,900 from $3,100 for the second quarter of 2003. Interest and other income for the first six months of 2004 decreased by $2,400, or 27.0%, to $6,500 from $8,900 for the first six months of 2003. The decreases were primarily due to lower average rates of interest being earned on excess cash on-hand throughout the second quarter and first six months of 2004 as compared with the second quarter and first six months of 2003. Although there are indications that the Federal Reserve Bank may be modestly raising interest rates in the near term, we anticipate that lower levels of excess cash will offset any such raise. Accordingly, we anticipate that interest income for the remainder of 2004 will be lower than comparable periods from 2003. Net Loss As a result of the foregoing items, net loss for the second quarter of 2004 was $732,000 an increase of $314,300, or 75.0%, from a net loss of $417,700 for the second quarter of 2003. Net loss for the first six months of 2004 was $1,163,100, an increase of $365,300, or 45.8%, from a net loss of $797,800 for the first six months of 2003. As a result of our continued operating loss we intend to continue to pursue revenue growth opportunities through all available means. Liquidity and Capital Resources As of June 30, 2004, cash and cash equivalents totaled $1,258,800, an increase of $233,300, or 22.8%, from $1,025,500 as of December 31, 2003. The increase in cash and cash equivalents was primarily attributable to the $936,600 net cash infusion from the private placement we completed during the first quarter of 2004. Offsetting the cash infusion was our $1,163,100 net loss for the first six months of 2004, which resulted from the continued consumption of cash by our operating activities. Included in net loss are non-cash charges, comprised of depreciation and amortization, which aggregated approximately $517,400. 18 Our operating activities used $696,800 during the first six months of 2004, including a reduction in accrued liabilities of $56,900 and a $195,200 increase in accounts receivable. Cash for operating activities was generated during the first six months of 2004 through an increase of $56,900 in accounts payable and $145,800 in short and long-term deferred revenue. The increase in the total of short and long-term deferred revenue was primarily due to the deferral of approximately $276,900 of aggregate Windows-based product revenue we derived from transactions entered into with a distributor that did not meet all of the criteria for revenue recognition at the end of the second quarter of 2004. Offsetting this increase was the recognition of revenue from a year-end 2003 transaction that had been previously deferred, due to various uncertainties surrounding certain issues pertaining to the transaction. During the first quarter of 2004 these issues were resolved. Upon resolution of theses issues, we concluded that all elements necessary to recognize revenue were present. Consequently, we reclassified the product-licensing portion of the transaction from the deferred revenue accounts to product licensing revenue. The service portion of the transaction remains in deferred revenue and is being ratably amortized over a two-year period. Our condensed financial statements have been presented on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. We have suffered from recurring losses and have absorbed significant cash in our operating activities. These matters raise substantial doubt about our ability to continue in existence as a going concern. The condensed financial statements do not include any adjustments relating to the recoverability and classification of assets or the amount and classification of liabilities that might result should we be unable to continue as a going concern. We are exploring all options available to increase revenues and to find alternative sources of financing our operations. If we were unsuccessful in obtaining these strategic goals, we would face a severe constraint on our ability to sustain operations in a manner that would create future growth and viability, and we may need to cease operations entirely. The $947,100 net cash provided by financing activities consisted primarily of the $936,600 net cash proceeds of the private placement as well as $3,600 received from the issuance of our common stock to employees through our employee stock purchase program. Another source of cash from financing activities was the receipt of approximately $6,900 from the exercise of warrants that were issued in conjunction with the private placement. Gross accounts receivable as of June 30, 2004 increased by $195,200, or 34.4%, to $763,100, from $567,900 as of December 31, 2003. The primary reason for the increase was the timing of a small number of large sales transactions that occurred during the last few days of the second quarter, which were offset by year to date cash collections. As of June 30, 2004, the costs basis of our purchased technology became fully amortized. Purchased technology is comprised of various acquired technologies that have been incorporated into one or more of our products. These amounts are amortized to cost of revenue, generally over a three-year period. Purchased technology amortization expense for the second quarter of 2004 decreased by $39,500, or 19.1%, to $167,500 from $207,000 for the first quarter of 2003. For the first six months of 2004, purchased technology amortization decreased by $79,000, or 19.1%, to $335,000 from $414,000 for the first six months of 2003. 19 The decrease was due primarily to various components of the purchased technology becoming fully amortized during 2003. Since the net book value of purchased technology as of June 30, 2004 was $0, we expect cost of revenue to decrease significantly during the third and fourth quarters of 2004, as compared with the respective periods in 2003. Accounts payable as of June 30, 2004 increased by $56,900, or 108.8%, to $109,200 from $52,300 as of December 31, 2003. Accounts payable are comprised of our various operating expenses and increased due to the timing of the payment of various invoices. Accrued expenses as of June 30, 2004 decreased by $56,900, or 12.1%, to $413,900 from $470,800 as of December 31, 2003. Accrued expenses are charges for services rendered for which an invoice has not yet been received such as consulting fees, legal and accounting fees, and utilities. Items that were accrued as of December 31, 2003 that were paid out during the first six months of 2004, thereby decreasing accrued expenses, included approximately $69,800 of employee costs (primarily accrued salaries, commissions and benefits) and $72,900 of outside services, including legal fees, accounting fees and engineering consulting fees. Offsetting these decreases was an increase in accrued accounting fees, primarily related to the 2004 annual audit. As of June 30, 2004, we had current assets of $1,999,200 and current liabilities of $1,438,900, which netted to working capital of $560,300. Included in current liabilities was the current portion of deferred revenue of $915,800. We have been successful in significantly reducing operating costs through a series of strategic restructurings and work force reductions that began in September of 2001. Based on our current operating revenues and reduced operating cost structure, and the cash raised in the private placement, which closed during the first quarter of 2004, we believe that we will be able to support our operational needs with currently available resources for at least the next few quarterly periods. Stock Option Exchange Program On June 24, 2003, we announced a voluntary stock option exchange program for employees who were not executive officers or members of our Board of Directors. Under the terms of the exchange program, eligible employees had the opportunity, if they so chose, to cancel any of their outstanding unexercised options to purchase our common stock that had an exercise price greater than or equal to $0.50 in exchange for an equal number of new options to be granted at a future date. The exchange program was open until 5:00 p.m., Eastern Time, on July 23, 2003. The new options were granted on January 26, 2004 at an exercise price of $0.41 per share, the closing bid price per share of our common stock on the grant date of the new options. The following table sets forth details pertaining to the eligibility and results of the exchange program as of the program's close on July 23, 2003:
Eligible to Elected to Total Exchange Exchange Number of eligible --------- ----------- ---------- Employees 24 21 19 Percentage (1) 100.0% 87.5% 90.5% 20 Outstanding options 2,776,161 677,917 578,935 Percentage (1) 100.0% 24.42% 85.4% (1) Elected to exchange percentage calculated as a percentage of eligible to exchange. Eligible to exchange percentage calculated as a percentage of total.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk We are currently not exposed to any significant financial market risks from changes in foreign currency exchange rates or changes in interest rates and do not use derivative financial instruments. A substantial majority of our revenue and capital spending is transacted in U.S. dollars. However, in the future, we may enter into transactions in other currencies. An adverse change in exchange rates would result in a decline in income before taxes, assuming that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, such changes typically affect the volume of sales or foreign currency sales price as competitors' products become more or less attractive. ITEM 4. Controls and Procedures Our management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2004. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. There has not been any change in our internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act that occurred during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 21 PART II--OTHER INFORMATION ITEM 2. Changes in Securities, Uses of Proceeds and Issuer Purchases of Equity Securities During the second quarter of 2004, we granted stock options to certain of our employees to purchase an aggregate of 410,000 shares of common stock at an average exercise price of $0.65 per share. We also granted stock options to our outside directors to purchase an aggregate 152,500 shares of common stock at an exercise price of $0.56 per share. The grant of such stock options to the employees and directors was not registered under the Securities Act because the stock options either did not involve an offer or sale for purposes of Section 2(a)(3) of the Securities Act, in reliance on the fact that the stock options were granted for no consideration, or were offered and sold in transactions not involving a public offering, exempt from registration under the Securities Act pursuant to Section 4(2). During the second quarter of 2004, we received gross proceeds of $6,900 through the exercise of five-year warrants to purchase 30,000 shares of common stock at an exercise price of $0.23 per share. The securities were not registered under the Securities Act of 1933 because such securities were offered and sold in transactions not involving a public offering, exempt from registration under the Securities Act pursuant to Section 4(2) and in compliance with Rule 506 thereunder. ITEM 5. Other Information. Effective August 1, 2004, we commenced a one-year operating lease for our corporate offices in California. Monthly rental payments for this facility are approximately $1,400. We anticipate moving into these facilities, which are located at 3130 Winkle Avenue, Santa Cruz, California 95065, during August 2004 and do not anticipate that any material costs will be incurred as part of the move. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 31 - Rule 13a-14(a)/15d-14(a) Certifications Exhibit 32 - Section 1350 Certifications (b) Reports on Form 8-K During the quarter ended June 30, 2004, we filed or furnished the following current reports on Form 8-K with the Securities and Exchange Commission: Current report on Form 8-K, dated May 11, 2004, was furnished on May 12, 2004. The item reported was: o Item 12 - Results of Operations and Financial Condition, which reported the issuance of a press release announcing our financial results for the quarter ended March 31, 2004. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GraphOn Corporation (Registrant) Date: August 16, 2004 By: /s/ Robert Dilworth --------------------------------- Robert Dilworth, Chief Executive Officer (Interim) and Chairman of the Board (Principal Executive Officer) Date: August 16, 2004 By: /s/ William Swain --------------------------------- William Swain, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 23